We share our latest observations on global asset markets in relation to T8 Gold

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

Key points

• The key factor influencing the gold market during the month was the US election and the much stronger mandate for the Republicans than markets had expected.
• We believe this stronger policy mandate, in the context of President-elect Trump’s relatively extreme rhetoric, rattled markets and drove the powerful intramonth moves in US Treasury yields and the US dollar which was a considerable headwind for gold bullion in the first half of the month.
• This resulted in gold bullion-backed ETFs experiencing their first month of net outflows since April this year. In spite of this, outflows stabilising for the remainder of the month and the gold price rebounding would indicate that investors bought the dip, which is an encouraging sign.
• A blistering rally in Bitcoin is also likely to have contributed to the downward pressure on the gold price.
• Offsetting these negatives, central banks continued purchasing gold at elevated levels, reporting their strongest month year-to-date (central banks have accounted for 20% of gold demand so far this year, more than double the post-financial crisis average of around 10%).
• The most notable buyer was China which made its first purchase since April (China was the largest central bank purchaser of gold during the first quarter of this year and was the top buyer in 2023). We believe China’s resumption of gold buying is a very strong signal especially with the gold price near to all-time highs.
• We believe the higher and higher prices at which central banks have been purchasing gold, has the potential to create a floor under the gold price, or a dynamic akin to a ‘central bank put’.
• Gold mining equities weakened in line with the contraction of their profit margins as a result of the weaker gold price.
• Valuations on gold mining stocks are at what we believe is a 25-year low. We see the dislocation as a significant opportunity which investors haven’t yet recognised.

Market update

Macroeconomic data

The key factor influencing the gold market in November was the US election. While the election of Donald Trump wasn’t necessarily surprising (given close polling), the Republican sweep of the Senate alongside the House of Representatives was a much stronger result (and mandate) for the Republicans than markets had expected.

We believe this stronger policy mandate, in the context of President-elect Trump’s relatively extreme rhetoric, rattled markets and drove the powerful intramonth moves in US Treasury yields (10-year US Treasuries spiked by 17 basis points to 4.45%) and the US dollar (US Dollar Index +3.4% to 108). These powerful moves in gold’s two key macroeconomic drivers were a considerable headwind for gold bullion resulting in a sudden drop by 6.6% intramonth, before rebounding to end the month down 3.7%. While Scott Bessent’s nomination as Treasury Secretary reassured markets, it appeared to blunt gold’s recovery (which is intuitive on the basis that his nomination reduced the market uncertainty that gold was benefitting from given its safe haven characteristics).

We also believe that a blistering rally in Bitcoin (+38.5%) contributed to the downward pressure on the gold price. We believe it is almost certain that investors were substituting gold for Bitcoin via flows being directed out of gold bullion exchange-traded funds (ETFs) into Bitcoin ETFs.

In the two weeks following US election day (to 15 November), we estimate spot Bitcoin ETFs saw approximately US$4 billion of inflows. This compares with US$2.5 billion of outflows from gold bullion ETFs over the same period. The balance of the month saw outflows from gold bullion ETFs neutralise, while Bitcoin ETFs saw inflows continue at a modest level.

The rally and flows were largely attributed to President-elect Trump’s pro-cryptocurrency stance and promises of favourable regulations for the industry.

While we see a very real future for a digital financial system (i.e. digital currencies, decentralised finance, blockchain technology, smart contracts, asset tokenisation, etc.), we see considerable risks related to Bitcoin on the basis that it has numerous attributes of a ‘speculative mania’ which weaken the argument that it should be considered a ‘store of wealth’. On this basis, and following the recent flows, we see genuine potential for gold to benefit significantly under a scenario where Bitcoin experiences a major reversal.

The wall-to-wall coverage of the election overshadowed everything else, including a US interest rate cut (a cut of 25-basis points taking the target rate to 4.50-4.75%). The interest rate cut would indicate that the Federal Reserve considers inflation to be remaining on a downward trend, headed back towards target levels. Inflation and unemployment data reported during the month was in line with consensus expectations with the Core Personal Consumption Expenditures Price Index (Core PCE) at 2.8% and unemployment steady at 4.1%.

The US dollar weakened from its intramonth highs but still closed higher month-over-month (the trade weighted US dollar index +1.7%) while US Treasury yields in real terms (the nominal yield minus expected inflation) ended the month more or less unchanged (the nominal yield on 10-year US Treasury notes contracted by 12 basis points, driving the implied real yield 3 basis points lower).

At the end of November, markets were pricing in a two-thirds chance of another 25-basis point interest rate cut at the December meeting, up from just over 50% at the end of October, implying a downward trajectory to real yields and the US dollar on a base case, all else being equal, which would be a tailwind for gold.

Gold bullion market

Gold ETFs

The abovementioned factors in the first half of November resulted in gold bullion-backed ETFs experiencing their first month of net outflows since April this year. In spite of this, flows neutralising for the remainder of the month and the gold price rebounding would indicate that investors bought the dip, which is an encouraging sign.

You will recall that Gold ETFs are the key swing factor in the gold market on the basis that they can contribute materially to both demand and supply, depending on whether they are in an accumulation or liquidation cycle.

We believe that gold bullion ETFs remain in an accumulation cycle which we expect to be a materially positive driver of the gold price over a multi-year timeframe.

Central banks

Central banks have accounted for 20% of gold demand so far this year (more than double the post-financial crisis average of around 10%) and this trend continued during November with central banks reporting 60 tonnes of net purchases, the strongest month recorded year-to-date.

The larger purchases included India adding 27 tonnes of gold to its reserves, followed by Turkey and Poland with 17 tonnes and eight tonnes respectively. The most notable purchase, however, was made by China which bought five tonnes. While it was small, the purchase was its first since April, prior to the central bank pausing an 18-month run of additions to its reserves.

China was the largest purchaser of gold among central banks during the first quarter of this year and was the top buyer in 2023. We believe China’s resumption of gold buying is a very strong signal especially with the gold price near to all-time highs.

We believe the higher and higher prices at which central banks have been purchasing gold, especially over the last six months, has the potential to create a floor under the gold price, or a dynamic akin to a ‘central bank put’.

We believe elevated central bank purchases will continue for the foreseeable future.

Outlook for the gold price

The price of gold bullion finished November at US$2,643 per ounce (-3.7%) and silver at US$33 per ounce (-6.2%). Both metals remain in established longer-term uptrends despite the recent dip.

There is no change to our belief that gold bullion ETFs are in an accumulation cycle at the same time as central banks are buying gold in volumes not seen since the 1960’s. Our base case forecast is for the gold bullion price to strengthen by 25% on a 12-month view.

Gold mining equities

Gold mining equities (-7.2%) weakened in line with the contraction of their profit margins as a result of the weaker gold price.

Valuations on gold mining stocks are at what we believe is a 25-year low (in terms of their discount to gold bullion, based on the spread between the spot gold price and the gold price implied by the market price of the equities). Further, we observe that gold equities have rarely been cheaper than the present time over the last 40 years.

We see this dislocation as a significant opportunity which investors haven’t yet recognised. We believe a normalisation is inevitable driven by gold sector momentum becoming impossible for equity investors to ignore and mergers and acquisitions chasing gold mining equities’ strong fundamentals and compelling valuations. History suggests that the normalisation of such a dislocation is likely to be rapid (as opposed to gradual).